The great Fed has spoken!
Fed Chair Powell’s speech at the Jackson Hole Economic Symposium started with this:
Four and a half years after COVID-19’s arrival, the worst of the pandemic-related economic distortions are fading. Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic. Supply constraints have normalized. And the balance of the risks to our two mandates has changed.
The Fed’s dual mandate is to ensure price stability and promote full employment. Powell’s opening remarks acknowledge that the risk has shifted from inflation to employment.
Today, the labor market has cooled considerably from its formerly overheated state…All told, labor market conditions are now less tight than just before the pandemic in 2019—a year when inflation ran below 2 percent. It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions.
As a conclusion:
The upside risks to inflation have diminished. And the downside risks to employment have increased…
The time has come for policy to adjust.
Well halle-frickin-lujah!!
Behind the Curve
The question now: is the Fed once again behind the curve?
It’s tempting to say the recent massive downward 818,000 revision to payrolls makes the answer obvious. Employment has clearly been weaker than anyone thought over the last year. Instead of 242,00 new jobs a month, the economy was only creating 174,000 new jobs a month. Of course the Fed is behind the curve…
Economic trends usually have momentum. The Fed didn’t start hiking rates until March 2022. And it started the hiking cycle so meekly that inflation continued ramping higher until June, when it peaked at 9.1%.
It’s pretty easy to extrapolate and conclude that the unemployment rate might continue rising past the next Fed meeting on September 17-18. Especially if the fed once again starts meekly with a quarter-point cut.
There is a counterpoint here. And it has to do with second-quarter earnings that are just winding down…
Corporate America is incredibly good at growing revenue and earnings even in the most challenging economic environments. And earnings for the April – June rose 10.8% from the same period in 2023. That’s the best year-over-year earnings growth since 2021, when the comparison was to the pandemic earnings collapse.
Walmart (NYSE: WMT) and Target (NYSE: TGT) each reported fantastic numbers and basically said that the consumer was strong. The most recent retail sales number came in at +1% – three times stronger than the +0.3% analysts were expecting.
The point here is these anecdotal metrics were achieved in an economy that was only creating 174,000 instead of 242,000 jobs a month. The S&P 500 is back to a stone’s throw from all-time highs because investors believe the mythical soft landing scenario is still possible…
Expectations and Reality
I’ve laid out the bullish case. The bearish case remains in play because this market is expensive. The current Price-to-Earnings (P/E) ratio for the S&P 500 is 29.
Expectations are high. And that means any disappointment will be profound.
Nvidia reports earnings next Wednesday… The worst month of the year for stocks, September, is dead ahead… The next Non-Farm Payroll report comes out in two weeks, on Friday, September 6…
Take some money off the table and prepare to put it to work on a sell-off.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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